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Michigan Corporate Law

Corporate Law in Michigan

In Michigan, corporate law governs the formation and operation of corporations formed under the Michigan Business Corporation Act, or businesses that existed prior to January 1st of 1973 under any previous statute. This law covers the rights and obligations of all parties involved in the formation, ownership, operation and management of an incorporated business. The Michigan Business Corporation Act is applicable to any domestic or foreign corporation authorized to conduct business in the State of Michigan. There are certain exceptions for industries such as insurance, surety, savings and loan associations, fraternal benefit societies and banking corps.

Corporations exist in order for individuals to conduct business with limited liability for themselves. This is possible because they are considered a separate legal entity from the individuals who make and own it. In Michigan, corporations are legally able to conduct business in their own name in the exact same manner as a person. The ease of doing business combined with limited liability makes a corporate structure appealing for a wide range of businesses across many different industries.

Because of the often complex nature of corporate law and the formation of corporations, it is strongly recommended to consult with an attorney specializing in business law.

Benefits of a Corporation

One of the largest benefits of a corporation is its ability to insulate owners from personal liability. The framework of incorporation creates a legal barrier that can be invaluable to an owner in the event the corporation is sued. The only liability that an owner has in the event of a lawsuit is the loss of his or her portion of corporate ownership.

Another benefit is the fact that corporations are legally considered individuals, with many of the same rights. Corporations are formed as a result of owners pooling their financial and material resources together into this separate entity which acts on its own. This makes owners resources far less vulnerable to creditors and financiers than other types of business structures.

A large benefit for long term stability in a corporation is the ease of ownership transfer. In the event an owner no longer desires to have a share in the corporation, they can transfer their shares with little difficulty. This prevents the company from shutting down, as it would during the transition period in other types of business structures, such as the transferring of the ownership of a partnership.

A final benefit of corporations is the ability of owners to be hands off on the day to day operations of the business. Corporations have a board of directors as well as officers who handle the daily operations of the company. While owners can have a say in large decisions, they are not required to do so and can remain silent owners while continuing to receive shares of the profits. Generally speaking, the largest decision the owners of a corporation make is the election of board members who then select officers and run the company.

How to Form a Corporation

In order for a business to become incorporated, there must be articles of incorporation filed by one or more persons with LARA, Michigan’s business licensing and regulatory affairs bureau. For domestic corporations, their name shall include these words or abbreviations thereof: “corporation” (corp), “company” (co), “incorporated” (inc), or “limited” (ltd). Generally speaking, the articles of incorporation contain the following provisions:

  • Legal name of corporation
  • Reasons for incorporation
  • Quantity of shares being issued by corporation, as well as the classes and series of shares issues
  • Mailing address of corporations first registered office and name of initial resident at that address
  • The names, addresses and other identifying information of the incorporators
  • Duration of the corporation in the event it is not perpetual

After the articles of incorporation have been filed with LARA, then a board of directors is selected by a simple majority of the incorporators. The board then adopts bylaws and elects officers during their first meeting. These bylaws regulate how a corporation is governed and are able to be amended periodically as required by the board of directors. In Michigan, every corporation authorized to do business in the state should have a registered office and a resident agent. This is regardless of whether or not the corporation is domestic or foreign.

Key Individuals in Corporations

Corporations by their nature involve a significant number of people in management and operations. This can be confusing for those who have no experience in corporate structure. However, there are several individuals to be aware of who are key players in the operations of a corporation. These are the owners, directors, officers, employees and creditors/debtors.

Owners are the first and most powerful group in a corporation. These individuals are either the ones who founded the corporation in the first place or those who invested in the corporation sometime after its formation via the purchasing of stock. The larger the share of the corporation an owner holds, the more control they have over decision making. It is common for owners to be referred to as shareholders.

Underneath owners are the directors, who are members of the board of directors that oversee the corporation’s activities. Directors are typically elected by the owners or stockholders, and serve finite terms outlined in the articles of incorporation. While they are elected by the stockholders, they do not necessarily have to follow their will when voting on the board.

Officers handle the bulk of daily operations, and follow the decisions laid out by the board of directors. These officers have direct control of the overall operations of the corporation. Underneath the officers is management, who then directs the day to day functions of employees who serve the corporation for pay.

Creditors and debtors are individuals and companies who do business with the corporation. Creditors are typically banks who provide monetary loans to the corporation, or suppliers who provide material or product to the corporation on a credit basis.

Debtors are usually individuals or companies who the corporation provides goods or services to with a line of credit. A good example of this would be a corporation who is a supply warehouse providing goods to a retail store, who pays them back over time through credit terms such as net 30, net 60, etc.

Issuance of Corporate Stock

Corporations have the ability to issue additional shares of stock, per their guidelines laid out in the articles of incorporation. These shares may be one class or may be divided into multiple classes of two or more types. If the additional shares issued are of multiple classes, then each class shall be uniquely designated in order to distinguish them from each other.

The articles of incorporation may limit, deny or otherwise prescribe the voting rights of shareholders and may limit or prescribe the distribution, dividend or liquidation of shares regardless of their class designation. Shares are issued with share certificates to the shareholders of a corporation, and each certificate shall state the following on its face:

  • That the corporation issuing said share is formed under Michigan State Law
  • The legal name of the individual the share was issued to
  • Number and class of shares issued as well as their designation that their certificate represents

Shareholders and Corporate Management

Shareholders normally meet on predetermined dates at predetermined locations, per the corporations bylaws. Normally this consists of what is known as the annual meeting of shareholders. However these meetings can also take place at any determined by the board of directors, such as at the registered corporate office or another location.

As mentioned previously, the actual management of the corporation begins with the board of directors. The board can consist of just one person, but typically consists of multiple people – the exact number is fixed by the articles of incorporation. These directors are elected by the shareholders annually, and can serve indefinitely if they are continually reelected. Directors select corporate officers, who carry out the daily operational tasks. Management under the corporate officers varies depending on the needs of the particular corporation.

Financial Statements

Every year, corporations are required by the Michigan Business Corporation Act to prepare and distribute to each shareholder a financial report of the company for the previous year. This report must be submitted within four months after the end of the fiscal year it is covering, and must include several key financial elements. These include the corporation’s statement of income, its year end balance sheet, a statement of source and application of funds if prepared by the corporation and any additional information that may be required per the State of Michigan.

In addition to this financial report, the state also requires that all domestic and foreign corporations file a report with the administrator by May 15th of every year. The only exception to this is during the year of incorporation for new businesses. Per state law, the report is required to include the following:

  • Legal name of the corporation
  • Legal name of the resident agent and the official registered address of its Michigan office
  • Legal names and addresses of the company’s president, secretary, treasurer and every director
  • A description of the nature and kind of business in which the corporation engages in
  • If a foreign corporation, then they are required to report the total number of shares and most recent percentage used in the computation of the corporate taxes paid

If there are no changes made to the information filed in subsequent annual reports, then the corporation can simply file a report indicating to the administrator that no changes occurred in the required information since the last report was filed.

Amending and Dissolving Incorporation

There are times when a corporation may desire to amend their articles of incorporation, due to market changes, ownership changes or general changes within the company itself. These amendments can be something as simple as changing the name of the corporation to reorganizing stock shares. Below is a list of changes that are possible through amending the articles of incorporation:

  • Modifying a corporations name
  • Modifying or changing its purpose or powers
  • Modifying the duration of the corporation
  • Changing the number of stock shares
  • Modifying the classification of issued or unissued shares of stock, or canceling them altogether
  • Modifying the designation, preferences, limitations and rights in regards to current issued or unissued shares of stock
  • Creating new classes of shares
  • Changing or removing the right of stock shareholder to receive dividends
  • Authorize the board of directors to modify the designation, number of, preferences, limitations or rights of a series of shares
  • Remove, diminish or increase the board of directors authority within the corporation
  • Grant, limit or deny shareholders of a certain class of stock the preemptive right to acquire shares of the corporation
  • Change the registered office or its registered agent
  • Remove, change or add any provision for the management of the corporation

Sometimes it is necessary to dissolve a corporation instead of just making changes to its articles of incorporation. There are multiple ways to dissolve a corporation, which include:

  • Automatically via the expiration of the period of duration to which a corporation is limited by its articles of incorporation
  • Via the action of the incorporators of the company or its directors
  • Via action by the board of directors and stock shareholders
  • Via the judgment of the circuit court in which the corporation legally resides
  • As a result of failing to pay the filing fee for the annual report or failing to file the report altogether